Currency Futures in India

A futures contract is very similar to a forward contract, but with certain differences. A futures contract conveys the right to purchase or sell a specified quantity of a foreign currency on a specified future date at a rate which is fixed in advance. In a forward contract, the quantum of foreign exchange to be bought or sold at a future date is determined by the customer. In futures it is standardized. Forward contracts can be entered into by any individual, companies, Firms etc with any bank in India at any of their branches which are authorized to deal in foreign exchange. Futures, on the other hand, can be entered into by eligible persons with a financial futures exchange. Thus a futures contract may be defined as an agreement entered into with the specified futures exchange to buy or sell a standard amount of foreign currency at a specified price for delivery on a specified future date.
Reserve Bank of India after a lot of deliberations decided to introduce currency futures in India. Meanwhile, several smaller countries took the lead and initiative and introduced currency futures in smaller markets. Rupee futures commenced its debut in the Dubai Gold and Commodity Exchange in June 2007. India could not remain isolated for long and took the initiative in the context of global developments and with effect from August 29, 2008, trading in currency futures became a reality in our country. Initially, it was permitted only in the currency pair of USD / INR. It was available for trading on the National Stock Exchange & MCX stock exchange with a minimum lot size of USD 1000/- per contract and maturities up to twelve months.

Features


Futures Exchanges

  • Since a forward contract can be entered into with any bank it is referred to as an over the counter product. Futures, on the other hand, can be traded only on a recognized futures exchange. There are more than 50 future exchanges spread over the world. The important among them are the London International Financial Futures Exchange (LIFFE), International Monetary Market (IMM) –PART OF Chicago Mercantile Exchange. Futures trading commenced at IMM of Chicago Board of Trade in 1972, which continues to be the leading futures market in the world. 

Currency

  • The contract is available in four currency pairs. USD / INR, GBP /INR, JPY /INR & EUR /INR. 

Size

  • The size of one futures contract is USD 1000 (One Lot) for USD or 1000 units of the base currency the exception being JPY where the lot size is 100,000. However, the settlement for the customer is done only in Indian Rupees. 

Quotation.

  • The futures are quoted in rupee terms with a minimum price change of 0.25 paise. The outstanding position, however, is reckoned in USD terms. 

Maturities.

  • The contract is available with monthly maturities ranging from one to twelve months which means contracts are available which matures every calendar month. Thus a contract is popularly referred as January Futures, February Futures etc. 

Due Date.

  • The contract expires on the last working day of the month, excluding Saturday. 

Settlement Price.

  • The settlement price is fixed on the last trading day at the reference rate which is fixed by Reserve Bank of India. 

Last Trading Day.

  • The last trading day is two days prior to the expiry date. 

Trading Hours.

  • Trading can be done from 9 a.m. to 5 p.m.(Monday to Friday) On the last trading day trading can be done up to 12 noon. 

The advantages of currency futures are that it is 

1) Transparent. 
2) Ease of Trade. 
3) Efficient price discovery.
4) Submitting proof of underlying is not a precondition.
  • All resident Indian entities and individuals are permitted to trade in currency futures. There is no restriction that it should be used only for hedging purposes. No documentary evidence is required to be submitted to the exchange to prove that the customer has an underlying exposure. However Foreign Institutional investors & Non –resident Indians are not permitted to participate in the futures market. 
  • Anyone interested in trading in currency futures should first become members of the NSE/ MCX and open a trading account through accredited brokers. They will be required to complete the KYC norms which include signing of member constituent agreement, constituent registration form and a risk disclosure document along with any id proof and address proof document with the latest photograph. Once the documents are scrutinized and accepted a unique client identification number is allotted. Before actually commencing trading operations the applicant is required to deposit cash margin or any collateral security (Approved Equity Shares) as may be stipulated. 
  • When one purchases a currency it is termed as a “Long Position” & when one sells a currency futures it is termed as a “Short Position”. Depending upon the views of a person on the future price movements of a currency a position either long or short can be initiated. It is not necessary to hold the position until maturity. At any point in time either to limit the loss or to book profit a currency position can be liquidated. A position is squared by initiating a trade in the opposite direction. 
  • It is possible to place a limit order with the intention of restricting the loss which is termed as a stop-loss order. These orders will remain open till the market breaches the specified price level. Once the price breaches the level as specified in the stop-loss order it is executed as a trade. It is possible to either cancel or modify an order anytime before execution. It is a common practice by traders as and when they change their views on the currency movement. 
  • The valuation of the existing long or short position at the end of the trading day as compared to the original price of entry of the currency futures is termed as a mark to market. The difference between the closing price and the price at which the trade was originally initiated is either credited or debited from the margin account of the person initiating the trade. Open interest refers to the number of long and short positions for a particular maturity. 
  • Currency futures market has opened up another mechanism through which corporate can hedge their exposures. For people who have a strong risk appetite and willing to take risks by taking a view on currency movements, it offers an opportunity to test their skills and trade in the currency market. 


Smart Prep Kit for Banking Exams by Ramandeep Singh - Download here


Join 40,000+ readers and get free notes in your email

0 comments:

Post a Comment

Thanks for commenting. It's very difficult to answer every query here, it's better to post your query on IBPSToday.com